Posted on 16 Sep 2009
The Securities and Exchange Commission has set up an agency-wide task force to examine a financial product in which people collect cash for selling their existing life-insurance contracts.
The product, known as a life-insurance settlement, has come under greater scrutiny following the financial crisis. In recent months, Wall Street firms have begun securitizing the products by slicing them up and selling bundled pieces to investors.
Regulators are concerned about the securitization of these products and whether those who are selling their life-insurance policies and those buying them know exactly what they are getting, according to people familiar with the matter.
Some see echoes of the residential-mortgage market, in which pieces of mortgage-backed assets became widely distributed among financial firms and few people had a good grasp of the value of the underlying mortgages.
SEC Chairman Mary Schapiro asked her staff last month to open a task force that pulls staff from several divisions including enforcement, trading and markets, and corporation finance, a person familiar with the task force said.
"There are many questions raised by life settlements -- from sales practices to privacy rights to the role of securitizations," Ms. Schapiro said. "And the answers could help determine where more oversight is needed. This is a growing market and we want to be ahead of it."
The life-settlement industry says it is unfair to compare securitized life settlements to other products like mortgages or derivatives because they have a permanent value and aren't subject to the same kind of volatility.
Financial companies see the market as beneficial to seniors who may need the extra cash and investors who purchase the contracts.
"They unlock money that is otherwise tied up in a future promise to pay that may never be realized," said Doug Head, executive director of the Life Insurance Settlement Association.
The SEC is trying to get a better handle on the breadth of the market and how the products are marketed and sold to investors, said the person familiar with the task force. Regulators also are examining what should be disclosed to investors given that the underlying insurance policies that include private information about the insured, such as health information.